With my last post I wrote about setting goals. That ties into the post I am writing now very well. If your goal is to make a budget, save money or get out of debt this post is for you. I am going to explain to you about budgeting with the best of them! Today I would like to talk a little about those things.
In a survey by intuit 65% of Americans have no idea how much they spent in the previous month. This means that only 35% truly have a budget. You should know how much money comes in (income) and how much goes out (expenditures) each month and budgeting with the best of them will teach this. 54% of Americans say they never check their credit scores, there are a couple of reasons you should check your credit score regularly. You should know what your credit score is especially if you’re building your credit. By checking your credit, you will also know what debts you have.
On average Americans overspend by $7400 every year. the weekly amount that people spend not including the NEEDS bills (mortgage or rent, utilities etc..) is $340, this is $143 more than the average $197 budgeted amount. This could be your morning run to Starbucks or eating out every night, it all adds up. So, budgeting with a plan shows you how it makes sense to create a budget to curb the overspending.
What Does Your Debt Look Like?
American’s average $90,460 in debt, this includes all types of debt from credit cards to personal loans, mortgages and student debt. Gen X is leading in all categories except personal loans. They have the highest credit card balance at $8,215. Gen X have the highest auto loan balance, at $21,570 and have the highest average mortgage balance, at $238,344. They have the highest amount of student loan debt, an average of $39,981. Home equity lines of credit (HELOCs) averaged highest for Gen X, at $49,221.
How much do you owe? You should know exactly how much you owe on everything like what is the pay off amount on your house or car? It is imperative that you know these because if you don’t you will not know what you are saving for and how long it will take. Make a list of debts and the payoff
Why Is A Budget Plan Important?
The importance of making a budget is a financial lesson that cannot be overemphasized. If you and your family want financial security, following a budget is the only answer for many reasons. A budget is simply a spending plan that considers both current and future income and expenses. Having a budget keeps your spending in check and makes sure your savings are on track for the future.
A budget helps you figure out your long-term goals and work towards them. It helps ensure you don’t spend money you don’t have this is how you got into debt in the first place. Budgeting helps lead to a happier retirement as you pay off debt you will have more to save for your retirement. It helps you prepare for emergencies.
Choose A Budgeting Plan
Any budget must cover all your needs, some of your wants and — this is key — savings for emergencies and the future. The budgeting plan I am going to talk about today will include the envelope system and the zero-based budget. Let’s dig in and get to work.
First, I would like to talk about income. This is the amount of money that is made by the household. There are two kinds of income Gross and Net. Your Gross income is what you make before any deductions. Net is what you make after deductions this is what you bring home. When we talk about income for this post, we will be talking about your net income. There is a popular budget the 50/30/20 budget. This requires that 50% of your income will go to the needs, no more than 30% on wants, and at least 20% on savings and debt repayment.
Save 50% Of Your Income For Needs
You should save 50% of your income is saved for your needs. Needs are the things that are essential to life. Your needs should include but are not limited to, groceries, housing, basic utilities (electric, water, sewer, garbage, and phone), transportation, insurance. Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category. Childcare or other expenses you need so you can work.
If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you’ll have to adjust your spending. You can also shop your insurance, look for cheaper phone service, cheaper transportation or childcare.
Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. You might want to include dinners out, gifts, travel and entertainment. These are not needs! It is not always easy to decide. Is a gym membership a want or a need? How about organic groceries? Decisions vary from person to person.
Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a better cell phone plan, an opportunity to refinance your mortgage or less expensive car insurance. That leaves you more to work with elsewhere.
Leave 30% Of Your Income For Wants
Wants include but are not limited to entertainment, vacation fund, eating out and anything else that is not needed to live. If you’re eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings, or your debts are under control. But your budget shouldn’t be so austere that you can never buy anything just for fun.
Every budget needs flexibility and some money you are entitled to spend as you wish.” Your budget is a tool to help you, not a straitjacket to keep you from enjoying life, ever. If there’s no money for fun, you’ll be less likely to stick with your budget and a good budget is one you’ll stick with.
Commit 20% Of Your Income To Savings And Debt Repayment
Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt. Make sure you think of the bigger financial picture. That may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.
Savings Vs Debt repayment
Save first there are many reasons to save retirement, emergencies, vacation, new car and many other reasons. I would suggest establishing an emergency fund that can cover 3-9 months of your living expenses. Assume that if you lose your job, you’ll sacrifice luxuries such as pedicures or your premium cable TV package. Take your 50% divide that number in half. Can you save this monthly? If so, you’ll build a six-month emergency fund within the next year. This will give you money to help if you were to lose your job yes you may get unemployment. Unemployment runs out and may not be as much as you would need to pay your “needs” portion.
Obviously this is a huge task so if you can’t get it done in a year it is ok! Take 10% of your 20% put it in an account put the other to your debt. Start with the smallest debt work on it and pay minimum payment on everything else. Once it is payed off pick the next one and put it all to that one look for the interest vs balance. It might be better to pay on the higher interest than the higher amounts. Let’s say you have a school loan that is a huge amount like $30k at 3% interest. You have another loan on your car but since your credit might not have been the best your paying a slightly higher interest on your $25k loan at 7%. You are better off to pay off the car because you will pay more in interest.
Zero Balance Budgeting
Budgeting with the best of the requires the zero balance budget. The zero balance budget relies on the concept that you would allocate all the funds that month to something. Imagine having a checking account that has a zero balance at the end of every month.
Let’s say that you have $3000 net income This is $36k a year depending what state you live in this could bre decent or lower class income. but on average it is lower class. Look at the example by taking your 50/30/20 budget and applying it this way this is how it will be spent. If you have money left over, you are not done put the money somewhere. You can put extra money towards debt or into savings. We do not want money that is not going to a certain place we want zero balance at the end of the month.
According to surveys by Dave Ramsey conducted in Financial Peace University classes, people who do a zero-based budget (versus those who don’t) pay off 19% more debt and save 18% more money! Just from having a plan! The sooner you make a zero-based budget part of your money-handling strategy, the sooner you’ll start to see your debt go down and your savings go up.
Trimming The Fat
You would probably ask what if I spend more than I make? Well, there are a few ways you can change that could help.
- Stay away from eating out! You could save a couple hundred by not eating out. Also eating leftovers at home and clipping coupons will help save money on the groceries budget.
- Cut the cord! Cut out cable and Netflix or maybe chose one streaming service and only watch that one cut everything else.
- Get rid of your car payment. You can find a used car that will get you around and not have a large payment on a vehicle.
- Sell some of your items that you do not use or don’t use frequently.
- Get a second job.
- There are so many ways to trim and that is another blog post all together.
What is envelope budgeting? The concept of envelope budgeting is simple: you list out your expenses, label an envelope with each of those budget categories, and fill them with the cash you’ve allocated to each category. Spend as needed when an envelope is empty, you know you’re at your spending limit for the month in that category.
Could be as easy as using the 50% 30% and 20% categories. However, making a list of your expenses will show you more of where your money goes each month. Make a list of all your monthly expenses and how much you spend on each one. You might want to look at your transactions for the last few months to jog your memory so you’re sure to catch everything you spend money on.
Here are a few common budget envelope categories are rent/mortgage, utilities, food, transportation, childcare, minimum debt payments and entertainment (cable, streaming services and others).
Make sure to list irregular expenses that don’t happen every month, like bills that you pay every other month. Personally, we pay our water and sewer every other month. We would split the bill in half and put that in the envelope every month.
Here are a few common irregular expenses car maintenance, clothes, gifts, holiday expenses, vet bills, pet expenses and personal care services (like haircuts)
Wrap it up
to wrap it up budgeting with the best of them is the start to a debt free future if that is your goal. If your goal is just to save some money this will help that too I hope that you can get what you want and this helped. My wife and I have used these methods of budgeting with the best of them and they do work we have many envelopes and have saved the emergency funds plus some and other savings categories too. We have also been able to pay off debt we payed off a credit card and a car loan years earier than paying normal payments.
It is not always easy but when you look back and see what you have accomplished you will be amazed. Take what you have learned and keep learning make this your budget find what works for you if this doesn’t. Try to keep the 50/30/20 and zero ballance. the envelopes are good but if you can be good with money it can bemanaged with bank accounts.